Nasdaq Is Still on Hook as SEC Backs Payout for Facebook IPO

By

Jenny Strasburg and

Jacob Bunge

Updated March 25, 2013 1:39 p.m. ET

U.S. regulators approved a plan by
Nasdaq OMX Group
Inc.
to pay customers as much as $62 million for losses stemming from last year's bungled
Facebook
Inc.
stock-market debut, though the decision left the door open for Wall Street firms to take further legal action.

The approval of the plan by the Securities and Exchange Commission marks an end to months of uncertainty among brokers over potential relief for losses from the social-networking company's May 2012 initial public offering.

Wall Street banks are estimated to have lost around $500 million from the delay in the opening of Facebook trading and subsequent confusion over individual trades. Some of the worst-affected institutions remain split on the merits of a compensation plan that was sweetened last year after being initially rejected as inadequate.

Switzerland's
UBS
AG
has said the Facebook debut cost it $356 million, and said in a statement Monday that it intended to recover from Nasdaq "the full extent of our losses." A spokeswoman said the bank has already filed a demand for arbitration against Nasdaq with the Financial Industry Regulatory Authority.

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The highly-anticipated Facebook IPO was plagued with problems, potentially costing thousands of dollars to many small investors and further damaging Wall Street's reputation on Main Street. A Wall Street Journal report.

UBS on Monday said "the SEC's approval of the plan does not change our opinion," calling the payout "inadequate and insufficient."
Citigroup
Inc.,
whose losses were estimated at about $20 million, had also urged regulators to reject Nasdaq's plan, calling the package too small.

Nasdaq's compensation plan, which had been released for public comment by the SEC, did satisfy some of the firms damaged in the social network's rocky debut, including
Knight Capital Group
Inc.
and Citadel LLC. Each firm lost around $35 million trading the stock May 18.

UBS and Citigroup had also objected to Nasdaq's requirement, upheld by the SEC Monday, that any firms claiming compensation under the exchange's plan must waive legal claims against Nasdaq.

Representatives for Citadel, Citigroup and Knight Capital declined to comment on Monday.

Nasdaq needed SEC approval to amend rules capping its liability for all losses from an IPO at $3 million. The SEC found Nasdaq's plan consistent with securities law governing exchange operations, but said its decision Monday doesn't shield the company from lawsuits or further regulatory action.

Nasdaq plans to pay the compensation in cash, having initially proposed a $40 million payout last June that included about $27 million in discounted trading fees. Criticism of that plan led to the offer being increased in July to $62 million in cash.

Analysts at
Raymond James
said Nasdaq would be able to cover the payout through cash on hand. Its roughly $326 million cash stockpile includes a profit of about $10 million the exchange operator made by trading out of Facebook shares it had purchased to help open up the stock for trading May 18.

Finra will process and evaluate all claims submitted to Nasdaq, according to Monday's order. The self-regulatory body will then provide details to Nasdaq's board. The final amount Nasdaq will pay will be detailed in a subsequent filing with the SEC. Finra wasn't immediately available for comment.

"We are pleased that the Securities and Exchange Commission has approved our accommodation plan, which will enable Finra to promptly begin to process claims," Nasdaq said.

Talks between Nasdaq and the SEC to resolve the agency's investigation into the Facebook IPO are continuing, according to people familiar with the matter.

Nasdaq and the SEC have been in discussions regarding a potential monetary penalty to settle the investigation, The Wall Street Journal reported last month. At the time, talks included discussions of a penalty around $5 million, the Journal reported. Since then, discussions have continued, and the SEC's order granting Nasdaq approval of the compensation plan didn't address the settlement discussions.

An SEC spokesman declined to comment on any settlement talks. It is unclear how details of the discussions might have evolved, or when the talks might conclude. A settlement agreement isn't guaranteed.

The day of Facebook's IPO, Nasdaq's computer systems got caught in a loop while lining up orders before the company's shares started trading. The opening of trading in Facebook shares was stalled by half an hour. For almost three hours after that, Nasdaq failed to send order confirmations to brokers, causing uncertainty about who held what positions.

The widespread confusion fueled a market-wide debate over the soundness of the computer-driven trading that has come to dominate markets. Trading-technology innovations are credited for lowering costs but also criticized for complicating markets.

The Nasdaq plan will compensate brokers for losses taken on certain orders to buy and sell Facebook shares in the so-called "opening cross," the trade in the company's stock that set its initial price for open trading on U.S. markets May 18. After multiple delays, Facebook shares opened at $42 a share at 11:30 a.m. .

Nasdaq's plan covers orders to sell Facebook shares at $42 or less that were submitted to the exchange between 11:11 a.m. and 11:30 a.m. but never carried out due to problems at the exchange. Orders with the same parameters that resulted in an investor selling the shares for less than $42 will be covered as well, according to the plan.

The exchange operator also will compensate brokers who submitted orders during the opening cross that bought Facebook shares at $42, but didn't receive immediate confirmation that the trade went through.

The plan also will cover orders to buy Facebook at prices above $42 that went unconfirmed, if brokers then let their customers cancel those orders before 1:50 p.m. That was when Nasdaq sent out confirmations of trading done in the IPO.

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